(New York)

A lot of analysts and market gurus are currently talking down the high yield sector. Credit spreads have been rising and it does look like we are headed into a higher rate environment, so the arguments seem reasonable. However, Barron’s says there is still time to get in on high yields. One of the best parts of the market right now is that only 10% of it is comprised of CCC rated bonds, way below its average of 15-20%. That means credit-worthiness is better. Additionally, junk firms have been refinancing for years at ultra-low rates, which will keep default rates pinned. Finally, oil and gas firms, which comprise a high share of the market, are in better shape as prices have been recovering.

FINSUM: There are definitely some strong points here, but it would be a highly contrarian view to say that the prospects for the sector look good after surging for so many years. At best, the fundamentals look solid, but the macro environment looks poor.

(Washington)

The whole market seems to have become punch-drunk with blockchain fever. The recent cases of small companies seeing their share prices surge on the back of adding “blockchain” to their name has been well documented. Now the SEC is cracking down. Jay Clayton, chairman of the SEC had this to say on the issue, amidst an even larger statement shaming the rebranding practice: “The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed-ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering.”

FINSUM: The final straw seemed to be when a publicly traded company that specializes in Long Island ice teas changed its name to Long Blockchain and saw its shares skyrocket.

(New York)

The US stock market had a stellar 2017, with S&P 500 soaring 21.8% in the year. However, while still rising, REITs lagged far behind at just 8.7%. This year, the bad news has continued, with stocks overall up 6% and REITs down more than 2%. The underperformance has led to a debate amongst REIT managers as to why times are rough. Some think that it is because of the view that we are in a rising rate environment and the perception that there is a coming surge in new office buildings, apartment complexes, and storage units. Others, though, think that REITs are simply being forgotten because the big party has been in tech shares.

FINSUM: We do not think REITs are being forgotten, we just think they are getting less attractive because the both the macro cycle (higher rates coming) and their industry cycle (there is more inventory now) are shifting.

(Washington)

One of the weakest and most questionable aspects of the recent tax package was the federal government’s new policy to limit state and local tax deductions (referred to as SALT). The change is rules meant that total tax bills for residents of higher tax states were set to soar. Unsurprisingly, these states, including huge payers New York and California, are devising work arounds, such as making state taxes a donation, which makes them fully deductible. Or they could eliminate income taxes and boost payroll taxes. If states adopt such tactics, it will leave a gaping estimated $154 bn hole in the US Treasury’s budget over the next eight years.

FINSUM: This was a big unforeseen consequence of the tax policy that could have a major impact on the budget. Congress is probably going to have figure something out.

(New York)

Goldman Sachs is going on the record warning of “extreme” optimism in markets after stocks’ torrid start to the year. The bank says its cross-asset measure of risk appetite is the highest it has been since 1991 (!). The bank says the risk of losses is higher now, but that in their experience, signals from the macro economy tend to trump signals from risk appetite. Therefore, given that the world’s economy is moving nicely, the market may have more room to run. That said, Goldman is nervous about markets, saying “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”.

FINSUM: We think this grey-haired bull market still has some juice in it, but our big fear is how hard a recession might hit the markets (given high valuations), not just the economy.